Every year brings a fresh batch of research concerning the dynamics of retirement life. And this year, a number of studies have the potential to reshape aspects of retirement planning for the better. Having created many financial plans during our 25 years of business, we know that the choices and paths individuals take are deeply personal. Every financial plan is different in some way. No set of historical data applies to every client, but understanding what research uncovers about retirement improves how we think about the future and anticipate what it will bring.
Periods of Retirement
This year, some research about retiree spending has surfaced that is particularly helpful for financial planning. It has long been assumed that retirees’ living expenses rise over time, which to some extent is true, but there is some fluctuation that should be noted. In the years immediately after retirement, expenses are often especially high because many couples choose to do things from their bucket list such as world travel or home remodeling. Then, as people age and the demands of travel become less attractive, expenses go back down; but they rise again later as medical expenses go up. These three periods of retirement have become known, respectively, as the “go-go,” the “slow-go,” and the “no-go” years.
Correlation with the CPI?
New research has taken a look at the slow-go years. For a long time, this period of retirement has been treated as if expenses during this stage of life increased at the same rate of inflation as in other periods of life. We assumed that expenses related to the slow-go period rose according to the Consumer Price Index (CPI); for example, if inflation was 3%, retirees’ expenses were expected to go up at approximately that same rate of 3%.
While using the CPI as a gauge works well for most phases of life, it turns out that for the slow-go phase, it may not apply. After reviewing new research in the Journal for Financial Planning, Certified Financial Planner™ Jonathan Guyton noted that retiree spending does not track with the CPI; in fact, it falls well short of it. The research suggests that this is true particularly for retirees between the ages of 65 and 85.
Take, for example, couples aged 65 spending $100K per year. If we assume that their expenses correlate with the CPI, we would expect them to be spending $158K annually by age 80. But according to the research, couples in this demographic will likely see their expenses trail the rate of inflation by 20%, resulting in actual expenditures of only $146K. By the time the couples are 85, the effect becomes even more dramatic as living expenses trail the rate of inflation by a surprising 30%. We’d expect CPI-correlated expenses to be $184K, but research shows they would actually be $159K. As we can see, expenses continue to increase, but much less substantially than once thought.
Not So Grim!
Most of the media coverage about retirement is grim. There are plenty of studies that show too many people are unprepared to cover their living expenses when they stop working. They haven’t sufficiently planned or saved for their retirement. But this new research presents a little hope. Instead of living expenses rising inexorably in lockstep with the CPI for all of retirement, it looks as though they moderate, which means the gap between needs and resources -mercifully shrinks a little. For that, we can be grateful.